Making it with $60k: What most investors miss in today’s market

According to Gehlot, investors today needed to focus on long-term capital growth over short-term cash flow, consider low-deposit lending options, and strategically select locations and asset types.

In light of the recent negative gearing reforms, Gehlot said investors should remain focused on long-term fundamentals and not be deterred from building portfolios grounded in capital growth, rather than short-term tax outcomes.

“Cash flow is for sustainability. People shouldn’t be losing sight of their ultimate goal, which is capital growth. They should not be compromising,” he said.

He advised investors concerned about the recent negative gearing changes to carefully consider the cash flow of properties they were planning to buy, and whether the purchase would be justified.

“Do an analysis on what cash flow would look like today. What does cash flow look like every year? Do it for the next five years and that will give you a lot more indication on how much is the actual impact,” he said.

Gehlot added that investors shouldn’t focus too much on a property’s initial negative cash flow, given that projected falls in interest rates, and rises in rents, were likely to limit the impact.

“The banks are projecting interest rates are likely to drop. In any decent market, because of the supply and demand imbalance, the rents are expected to rise, so your cash flow position is only going to get better,” he said.

“For example, if you buy a property today with $15,000 in negative gearing, next year it’s going to get better – it might be $12,000, it might be $11,000.”

Over time, he predicted the gap between rental income and the property’s expenses would continue to close until the investor reached a neutral or positively geared position.

For those seeking alternative ways to enter the market, Gehlot said some savvy investors opted to secure off-the-plan land to reap the benefits of future value growth and build houses at a later stage.

“I’m not talking about today’s time, where construction costs are expected to rise, but in a normal scenario when the prices usually stay stable.”

However, Gehlot said there were risks to the strategy, including that the investor would be buying the land at the developer’s price, which wasn’t a proper reflection of what the market was willing to offer.

“They release a limited number of lots every two, four weeks, and they are always increasing the price, and the buyer is under the delusion that their property prices are rising.”

For investors impacted by stretched affordability, Gehlot also said obtaining a five per cent deposit, although not ideal, would allow them to secure existing dwellings.

He said some lenders offered low deposits, but investors needed to be aware that they may have to pay lenders mortgage insurance (LMI).

“For some, LMI can be waived, but 5 to 10 per cent deposit is what is going to be. I wouldn’t call it a decent deposit but a workable deposit for you to get into an existing dwelling.”

Additionally, Gehlot advised new investors to only buy existing houses instead of apartments or off-the-plan homes, due to stronger potential for long-term capital growth.

He said that if an investor couldn’t buy a house in a certain area, they should look for a neighbouring suburb that they could afford instead, but always opt for freestanding dwellings.

“A safe bet for someone starting out would be going for a freestanding home in a market where the market cycle timing is favourable, and supply-demand fundamentals are strong.”

Listen to the full episode here.

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